Engagement fees as down payment?

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March 08, 2022

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

We're negotiating an LOI and we just had a seller ask if we could include an "engagement fee" which he described as a down payment. His logic is that he will be sharing all of the company secrets and he needs some compensation for the risk that we won't go and acquire a competitor, etc. Have any of you ever heard of something like this? Ideas for alternatives>

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Reply by a searcher
from University of Dallas in Houston, TX, USA
This is not market - you can push back and suggest this is not market standard approach. Generally, you sign an NDA which is a document that holds both parties to the same standard. In reality, there are rarely trade secrets that are actually worth protecting in the lower end of the lower middle market. It may just be fear on the sellers part - do your best to reassure them about your process.
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Reply by a searcher
from Dartmouth College in Boston, MA, USA
This should be pushed back against at all costs, it's not market terms plus an LOI is a non-binding agreement. If a seller wants the upside of receiving a large sum of money for what they have built, the cost is they need to be transparent with DD.
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